Way forward for SL fraught with macro-economic challenges

The Foreign Direct investment (FDI) component even though said to increase from around US$ 230 million in 2013 to over 1 billion by 2014, remains a value that has be improved substantially.

As the curtain falls on the Rajapaksa administration’s economic policies, 2015 could be an year filled with hope, but also in many respects fraught with macro-economic challenges with local and global policy implications. In this background, the new administration will have to implement appropriate economic and monetary policies to propel growth if Sri Lanka is to sustain its middle income status.

According to the Economist Intelligence Unit (EIU), the world economy will grow by 2.9% in 2015 while in 2014, the world GDP was estimated to have increased by 2.5%.

The global growth this year will be boosted by lower oil prices: a 10% fall is thought to add 0.2 percentage points to world GDP. America will be the best-performing rich-world economy in 2015, with growth forecast at 3.3%. But the world economy will be held back by weakness in the euro area and Japan, and by slower growth in emerging markets. China will see expansion slow to 7% in 2015.

As emphasized by the Central Bank of Sri Lanka (CBSL) last year, during the Rajapaksa administration, Sri Lanka continued with its upward macro thrust. The Gross Domestic Product (GDP) expanded by 7.3% in 2013 in keeping with an upper trajectory. It was pointed out by the Ministry of Finance that figure would hover around 7.5% for 2014.

Meanwhile, according to the International Monetary Fund (IMF), Sri Lanka’s economic expansion is expected to be in the neighbourhood of 6.5%-7% from 2014-2019, a favourable ratio when compared to the other developing economies in Asia which are expected to grow in the region of 6.5%-6.7% for the same period.

While announcing such overall positive outlook, the last administration admitted that key challenges and concerns did remain. Economic policy makers publicly said investment as a percentage of the GDP was at 31%, and it needed to increase to 33% of GDP by 2016 if Sri Lanka is to sustain its middle income status.

Other concerns included the trade deficit averaging around US$ 9.4 billion, which in turn pressurized the Total Foreign Assets (US$ 8.5 billion as of 2013 ) and the exchange rate, which hovered around the Rs.129 mark, continues to remain.

The Foreign Direct Investment (FDI) component, even though said to increase from around US$ 230 million in 2013 to over 1 billion by 2014, remains a value that has to be improved substantially.

Meanwhile, Moody’s ratings agency said recently that Sri Lanka’s new President has taken over a fast-growing economy, but one with a large government debt burden.

Sri Lanka’s government debt stands at 78 per cent of its Gross National Product (GNP) and 40 per cent of its revenue is spent as interest on loans obtained.

It will be watched with interest how the new economic policy makers will tackle shrinking exports, falling oil prices, plummeting Russian ruble, credit risk in foreign currency loans, public debt burden, trade ties with the USA and China etc., at a time the external view of Sri Lanka has improved in terms of democracy.